A reflection of the economy in part, the CV industry is facing an unprecedented slowdown.
Story by:
Bhushan Mhapralkar
The All India Transporters Welfare Association (AITWA) and All India Motor Transport Congress (AIMTC) recently announced that they have put on hold purchase of new trucks looking at the current business environment. Their announcement comes at a time when the CV industry is witnessing a steady drop in sales for the last eight months. A look at the SIAM production, sales and export report makes it clear. The SIAM report for July 2019, for example, reported a (-) 25.71 per cent decline in CV sales at 56,866 numbers as compared to 76,545 units in July 2018. As it loses pace, the CV industry is resorting to ‘no-production’ days. Re-aligning production and refraining from loading dealers, it is hand holding the suppliers.
With a slew of interest rate cuts by Reserve Bank Of India (RBI) failing to entice businesses, the current environment is seeing transporters grapple with falling demand and rising operating costs. On the condition of not revealing his name, a transporter from Delhi expressed that demonetisation and hasty implementation of GST seem to be at the root of the current situation where demand has shrunk anything. Stating that the business environment is very bad, he rued that hurdles have gone up. The transporter pointed at the news regarding a truck driver from Noida. He was allegedly beaten to death by seven bouncers, claiming to be a part of the flying squad at the toll booth at Yamuna bridge in Kalindi Kunj, Delhi, for not paying toll tax.
Tax woes
Witnessing the disappearance of many small and medium-scale transporters from the scene due to their inability to pass on any rise in operating costs, the CV industry is finding itself in a difficult situation. Pointing at factors like fuel price hike, and hike in insurance and consumables, a transporter from Navi Mumbai complained about near stagnant freight rates and lack of demand. Expressed another transporter with a fleet of six trucks, that the two-rupee cess on diesel announced in the Union Budget has added to their woes. The cost of fuel now exceeds 57 per cent of their operating costs, he informed.
Drawing attention to the high GST rate, two-rupee cess on diesel announced in the Budget, hike in presumptive tax and increase in insurance, Mahendra Arya, AITWA national president stated that the decision to put on hold purchasing of new trucks is the collective decision of AITWA and AIMTC members. “The current scenario is not conducive to the transport trade; is not amounting to a profitable business model anymore,” he said. Accounting for 7.1 per cent of India’s GDP, the CV industry has been facing some very unique challenges, including the enforcement of new axle norms late last year.
The new axle norms have had a profound effect. It has led to the creation of one year worth of excess capacity. Affecting CV sales negatively, the new axle norms have led to a fall in M&HCV sales primarily. In an environment where regulations seem to flow thick and fast, the comment of Anand Mahindra, Chairman, Mahindra & Mahindra, during the 73rd AGM, that the current slowdown in the auto industry poses a greater threat to the financial arithmetic, assumes importance. Pointing at the high GST of 28 per cent, Arya informed that small transporters are bearing the burden (of GST) directly as they are not able to get credit on it.
Defaulting on loans
Pointing at Government policies, a fleet operator in Mumbai, on the condition of not revealing his name, mentioned that any prospect of pre-buying looks bleak. He mentioned that he is finding it difficult to repay the loan on the trucks that he has purchased in the last two years. The delinquency in repayment of Equated Monthly Installments (EMIs) by truck operators started rising in the last quarter of the last fiscal. Revealed an industry source that it was almost proportional to the drop in demand from all the sectors. Mentioning that tipper sales slowed down as the country went into the election mode, affecting overall CV sales, an industry source explained that any likelihood of CV sales recovering quickly was put to rest by an uninspiring budget. S P Singh, Senior Fellow and Coordinator, Indian Foundation of Transport Research and Training, said that freight rates have remained stagnant for a long time now. Their remaining range-bound on leading trunk routes has affected heavy truck sales to a greater extent, he added. Mentioned Jasjit Sethi, CEO, TCI Supply Chain Solutions, “In India, freight cost is generally determined by the shipper requesting a quote from multiple vendors. He selects the lowest value quote for vendor selection. Fewer efforts are taken to evaluate if the cost provided by the transporter is realistic. There is no practice to derive a realistic transportation cost for a route. This leads to higher supply chain cost getting built into the final product.” “The government must define and fix the transportation charges for any given route for the logistics industry to regain its lost momentum,” he opined.
The near stagnant freight rates and a drastic fall in fleet utilisation levels have led to many transporters putting off buying new trucks for the last six months. In May 2019, the utilisation levels were roughly around 25 per cent. They have since further south. Claimed an industry expert about a substantial drop in round trip on 75 trunk routes. He revealed that transporters were already defaulting on EMIs. Informed Arya, “Our member associations across India have asked banks to reschedule loans till things improve.” With mass default and mass surrender of vehicles likely to become occurrence if loans were not rescheduled, the CV industry could be looking at a long road to prosperity. Expressed Arya, that it is not good to place CVs in the 28 per cent GST slab with ‘sin goods’ like cigarettes, paan masala, aerated water, and luxury cars. On an optimistic note, Sethi expressed, “The industry, reacting to new opportunities for efficiency with the implementation of GST could select higher capacity trucks for high volume regular dispatch routes and monitor as well as improve the volumes per consignment dispatched through trucks.” “Optimising the truck mix based on weight, rate, volume capacity and load density, in case of multiple truck type usage, will go a long way in improving the current situation,” he added.
Stating that GST is a cost and not an adjustment of credit or debit for a truck owner, Arya stressed upon challenges like floods and droughts affecting transporters. A transporter from Kolhapur averred that two of his trucks were submerged due to floods. Another truck ferrying potatoes was stranded on the highway. The potatoes rotted. With transporters tackling challenges like these, the CV industry is trying to cut loses in the best possible manner. Plant closures are making the news thus. Ashok Leyland announced the closure of its Pantnagar facility for nine days in August due to weak demand. Claimed an industry source, that Tata Motors closed its Jamshedpur and Pune plants for up to 12 days.
Struggling to push inventory despite offering large discounts, the CV industry is assuring suppliers and dealers of sustenance. With diesel accounting for 60 per cent of the operating costs, Arya said that there is immense pressure to stay afloat. Close to two-lakh people have lost their jobs in the last three months across dealerships, mentioned an industry expert. These include the skilled ones as well. Investing in upgrading their facilities, dealers are not finding much room to manoeuvre.
Procuring CVs from their principals by securing finance at hefty interest rates, CV dealers are finding the going tough. With inventory levels touching 60 days or more against the norm of two-to-three weeks in some areas of the country, CV dealers are offering higher discounts. Some are said to offer as much as eight-lakh rupees discount on a truck in the 40 to 49-tonne category.
Discounts galore
Explaining that CV discounts are based on region-specific freight movements and demand-supply situation, an industry source said that even the most attractive discount schemes are failing to push sales. As the big two – Tata Motors and Ashok Leyland – slug it out in the market, discounts continue to be largely subjective and customer-centric. They also continue to be region-linked. They continue to be linked to the customer order size, availability of finance and the level of unsold inventory. Gopal Mahadevan, Ashok Leyland CFO, during an investor meet in early August, is known to have said that it is not that we will let a large customer just walk away because of price.
Employee woes
Reduction in employee count is becoming inevitable as margins shrink and inventory levels pile up. Ashok Leyland is known to have introduced a Voluntary Retirement Scheme (VRS) and Employee Separation Scheme (ESS) for executive-level employees as part of its plan to cut cost and mitigate slowdown. Claimed an industry source that Tata Motors and M&M have also cut jobs. As the first line of action, most automotive OEMs are known to have fired their temporary workers. Offering the Super Carry SCV, Maruti Suzuki has retrenched some 3000 temporary employees to tide over the current situation. Expressed R C Bhargava, Chairman, Maruti Suzuki India, that the drop in auto sales is likely to have a large scale impact. Of the opinion that it may be too early to gauge the impact on jobs considering the current situation, an industry expert expressed that if this situation continues, more job losses are likely.
In its release, the Federation of Automobile Dealers Association (FADA) said that job cuts may continue with more showrooms being shut. In an interview to a wire agency, FADA President Ashish Harsharaj Kale said that majority of job cuts have happened in the last three months, starting from May 2019 and continuing through June and July. Hoping for the measures announced by finance minister Nirmala Sitharaman (see box) to take hold and uplift the market sentiments, many in the CV industry are pointing at prime minister Narendra Modi’s statement that Internal Combustion Engine (ICE)-powered vehicles and electric vehicles (EVs) will co-exist. Expressed Rajan Wadhera, President, SIAM, “(The prime minister’s statement) is in-line with SIAM’s recommendations for relevant technologies to co-exist in a journey towards sustainable mobility.” Wadhera called for a long-term roadmap for all futuristic technologies to instil confidence.
Supply Scenario
To counter slowdown, tier suppliers have had to curtail production and retrench contractual workers. Working with their OE clients to develop new technologies to meet new regulations and changing market requirements, they have made significant investments. With ROI not in sight, they could soon become a liability.
Sundaram-Clayton Limited (SCL), a TVS Group Company, recently announced that its Padi (which manufactures aluminium die-cast products) observed August 16 and 17, 2019, as non-working days due to business slowdown across sectors. On the condition of not revealing his name, a tier supplier of truck chassis at Pune said that he halted production at his plant due to the lack of demand. If the situation persists for long, he is contemplating exiting the business altogether. Many suppliers have come to share the same sentiment.
A few exceptions include suppliers like Setco, which recently announced that it has performed better despite the challenging environment. With a considerable global exposure, with operations in the UK, the company has reported sales of Rs.128 crore in the first quarter of FY2019-20, marginally down by (-) seven per cent year-on-year. Others are not so lucky. Valeo and Subros, in comparison, have had to lay off some 1,700 temporary workers to tide over the slowdown. Wheels India is also said to have cut its temporary workforce by as much as 800. Responding to a query, a senior Automotive Component Manufacturers Association of India (ACMA) official informed that job losses due to the slowdown are happening in automotive hubs like the NCR region, Pune, Jamshedpur and Pithampur. They are happening in regions like Chennai, Coimbatore and Rajkot as well, informed a source. In a bid to align their production and tide over cost pressures, suppliers are hoping that the Government intervenes; rationalises the GST rates first anf foremost. Unfortunately that does not seem to happen. No GST revisions were announced until the time of going to press. Like sin goods, auto components are claimed to be taxed at 28 per cent.
Informing that there are around 50 lakh workers in the auto components industry belt of Haryana, ACMA Director General Vinnie Mehta revealed that around 70 per cent of them are on contract. Stating that he is worried about the future of these workers as suppliers look to cut losses, Mehta said that if matters go from bad to worse, even the regular workers could be hit as there is not much work in the factories because of the lack of demand from OEMs. Never heard before, Bosch announced the closure of its factory for five days recently. Lowering this year’s turnover forecast to higher single-digit growth in comparison to a turnover of Rs.3.95 lakh crore in FY2018-19, ACMA is looking at the Government to intervene quickly. Averred Ram Venkataramani, President, ACMA, that there is an immediate need to stimulate vehicle demand. He drew attention to the significant price hike BSVI vehicles will attract as manufacturers look to recover the money they have invested in their development.
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With inputs from Anwesh Koley
A ray of hope
Deriving from prime minister Narendra Modi’s expression about the Indian economy growing to USD five-million level in the next five years, the auto industry could benefit from measures like the gradual reduction of corporate tax to 15 per cent. The industry could also benefit from the hold on hike in vehicle registrations charges. Sitharaman announced recently that the hike will be held back till March 2Aligning with the sentiments of the auto industry, Modi’s statement about Internal Combustion Engine (ICE)-powered vehicles and electric vehicles (EVs) co-existing should provide a reason for the auto industry to hope return of good times. The commitment of the government to drive infrastructure development should provide a ray of hope to the Cv industry. It could look at selling good number of tippers once more. A scrappage policy announcement could also provide a ray of hope to the Cv industry, the policy decision however has to be taken with utmost care. The announcement to create 100 tourist destinations by the prime minister in his Independence Day speech should work in favour of the growth of bus industry. As far as GST is concerned, the Government is said to be evaluating it.
— Ashish Bhatia
